AN EXAMINATION OF MACROECONOMIC NEWS AND EXCHANGE RATES DURING FINANCIAL CRISIS

Abstract

Using a large dataset consisting of more than 250 different macroeconomic indicators from eight countries, this paper examines the exchange rate movement of nine currency pairs, namely USD/EUR, JPY/USD, EUR/JPY, CAD/USD, EUR/GBP, AUD/JPY, NZD/GBP, CHF/USD and CAD/AUD, during the current financial crisis from 2007 to 2008 and investigates its relationship with general macroeconomic news announcements and categorized macroeconomic news announcements of four categories, which are GDP and its components, real activities, forward looking and price/monetary. We also divide the scheduled and unscheduled news announcements into their respective news sentiment groups with a combination of good news, bad news, neutral news and no news, and test whether the sign effect during good times discovered by Andersen et al. (2003) persists in economic downturn. Our main result indicates the sign effect does not hold true during financial crisis – bad news is not more influential than good news. Moreover, the number of significant indicators increases compared to the previous studies as we include more macroeconomic indicators in our research. We also find strong effect of categorized news surprises during the financial turmoil, in which macroeconomic indicators in forward looking category have the greatest impact on the exchange rate. A comparison across the different currency pairs reveals that intra-continental (within Asia-pacific, Europe and North America) currency pairs exhibit greater effect of categorized news surprises than their cross-continental counterparts whereas more news sentiment groups variables are significant in cross-continental currency pairs.